Some signs of life in the long-awaited pairing of pension money and large
building projects

Some 3,000 workers lost their jobs when the Manchester docks closed in 1982, and for a decade or so, most of Salford Quays was a wasteland.

But now, more than twice as many people work on the site, and property developers can’t get in fast enough. The BBC’s decision in 2006 to move sports and programming teams to the city, though disparaged at the time, has pulled in scores of other media and technology firms.

Peel, the property group responsible for building MediaCityUK’s glass-fronted offices and waterfront studios, has completed 1.6m sq ft of space and has planning permission for up to 3m sq ft.

“We’ve got people asking to buy things we’ve not even built yet, because they know it’s in the pipeline,” said Paul Stanworth, head of Legal & General Capital, which this year bought a 50pc stake in MediaCityUK and is already fending off bids to sell off slices of its investment.

Peel chose to team up with L&G instead of bidders from China and Canada, who have been winning auctions lately for British infrastructure projects, because it planned to stick with the project for decades.

Such partnerships suggest that the long-awaited move by British pension funds into infrastructure is finally happening. In theory, these big investors who fund our retirement could put billions of pounds into building projects, saving the Government some capital spending, while generating steady revenues to cover their long-term obligations.

However, the idea has been slow to take off in the years since Private Finance Initiatives fell out of vogue. The Treasury has spent four years trying to get a national Pensions Infrastructure Platform (PiP) off the ground, recently passing £1bn in funding compared to an initial £20bn goal suggested by the Chancellor.

Smaller local authority pensions have been reluctant to pledge money, with some discouraged by the complexity of infrastructure compared to parking their funds in low-yield bonds at a time when many are already facing serious funding shortages. George Osborne doubled down on this plan last month by calling for 89 pension schemes to club together into regional sovereign wealth funds

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The Pensions Infrastructure Platform itself has been cautious with its initial investments, turning to external managers. Mike Weston, chief executive of the PiP, has allocated funds to Aviva’s solar energy fund and Dalmore’s public-private partnership fund, which has this year backed the Thames Tideway Tunnel, while he waits for regulatory approval to make direct investments.

“PiP acted as the mechanism to bring those pension schemes together and that led to negotiations with the asset managers to make the opportunities attractive enough,” he said. “As PiP isn’t FCA-regulated, we cannot say PiP invested in the Thames Tideway Tunnel project, but I think it’s fair to say that without PiP that wouldn’t have happened.”

As with PFI projects, both the builder and the backer expect a balance of risk and reward. Pension schemes want inflation-linked revenues and an assurance of a safe long-term investment.

The National Audit Office has criticised the infrastructure guarantee scheme, which was intended to encourage investors, for putting too much of the taxpayers' money at risk.

The biggest pensions and savings companies are able to find opportunities on their own, or are large enough to withstand greater risks. Prudential’s M&G arm has spent heavily on housebuilding, while Aviva has set up its own solar power fund and the £38bn Universities Superannuation Scheme has a minority stake in Heathrow Airport.

Rothesay Life, a pensions consolidation firm, recently signed up to support a bond issue that will help to fund the £1bn extension of the Northern Line on the London Underground.

“It’s a win-win that ought to provide better funding for the lender as well as the borrower,” said Gareth Mee, executive director of risk and actuarial services at the accountancy group EY. “At the moment it’s very difficult for smaller funds to invest [directly] in infrastructure. Where there is more traction is with the infrastructure funds in the private sector, which are being linked to inflation. That’s an area that’s really developed.”

The next step for the Government is to find investors for a plethora of smaller projects, such as leisure centres, which cannot garner global bidders in the same way as prize assets like Heathrow or Hinkley Point.

Even the larger insurers have raised concerns that there is no easy way to find these sites in need of funding, although some hope the new National Infrastructure Commission could help improve matters.

Meanwhile, L&G is working with the English Cities Fund and Muse Developments to rebuild central Salford, although the funding structure has proved cumbersome. It has also pledged to back £1.5bn-worth of projects through the Regeneration Investment Organisation, set up in 2013.

In Manchester, there are also signs that the Northern Powerhouse, a combination of transport upgrades and marketing wheezes, is starting to draw in capital.

“The Northern Powerhouse gives us a broader brand that’s becoming known overseas. It’s a good idea, but it’s early days,” said Stephen Wild, managing director of MediaCityUK.

Paul Stanworth said L&G has already rebuffed two approaches to sell out of its stake in MediaCityUK, less than a year after buying in. However, the firm’s goal of helping to fill the funding gap in infrastructure requires it to take a longer-term view.

He contrasted this approach to the tactics employed before the financial crisis by banks such as RBS, which securitised their properties to bring in more investors, even when the underlying assets were less than reliable.

“That model was very much you buy, you transform and you sell. We want to buy, transform and manage. We are passing risk to customers who are with us for 20 years,” he said.